ERP addresses the challenges of MTO manufacturers

Make-to-Order (MTO) manufacturing is the production of specialized or unique one-off products in quantities ranging from one to small production runs. Usually, the final product is a combination of custom manufactured components and standard components.

With the recent stress placed upon the supply chain in recent years and the changing political alignment across the globe, we are seeing a trend for supply to be bought closer to home which has resulted in Australian MTO manufacturers attracting significant capital input and flourishing.

MTO operations bring their own set of unique challenges. Starting from the need for a one-off product to be fit for purpose off the production process – this implies a focus on quality to ensure the product(s) are delivered as per design. Coupled with the art of trying to balance unpredictable material demand with volatile prices and its effects on the business, with the need to keep raw material to a minimum to free up capital juxtaposed to the need to import raw material with long lead times.

On the shop floor we see challenges around scheduling to meet delivery requirements, managing the utilisation of capital intensive equipment with small production runs reducing efficiency and creating bottlenecks.

The good news is that an ERP system with a focus on planning and shop floor management can help to make sense of a complex environment and help to manage these competing demands on the business via a comprehensive operations plan.

Planning and risk management

MTO manufacturers must be able to plan effectively and manage the risks associated with the variability of customer demand and material supply. Typically we see problems such as:

  • They may struggle to meet demand and to deliver on time, resulting in potential lost sales.
  • Managing varying resource availability while meeting customer orders requires effective planning and scheduling.
  • If demand for a particular product unexpectedly surges, the manufacturer might not be able to ramp up production quickly due to material shortages or capacity limitations.
  • While customisation is a key feature of MTO, manufacturers must manage the risk between meeting a customer’s unique requirements and ensuring that production operates efficiently.
  • Customers are known to request changes to their orders after they have been placed, which can disrupt planned production schedules and require adjustments to material requirements.

An ERP system includes advanced inventory forecasting which allows manufacturers to plan raw material for the longer term at the macro level and plan for production in the short term (micro) along with managing capacity constraints at the shop floor level to maximise throughput.

Material planning

MTO businesses hold minimal inventory at the raw material level and production only begins with the receipt of a customer order. In planning for material requirements, they face three key challenges.

  • Unpredictable order volumes make optimising inventory levels difficult and make it hard to balance between overstocking and understocking.
  • Uncertain lead times for acquiring specific materials for customised products.
  • Minimising investment in stock is vital to efficient deployment of capital, hence we see delivery certainty as a key issue where close relationships are developed with vendors to reduce lead times and stock holdings.

Material Requirements Planning (MRP) can be a crucial tool in MTO. It helps to develop a production plan for finished goods by defining inventory requirements for components and raw materials and ensures materials are available for production. MRP is a kind of inventory optimisation system, meaning that it creates recommendations for inventory requirements to maintain the correct levels of inventory.

The MRP can also be used to specify alternate materials and suppliers. For example, a client who manufactures cooling equipment requires specific imported tubing which has long lead times and is subject to international events, strikes, shipping delays etc. To manage this the client maintains a pool of suppliers with a primary supplier and some ‘hot’ suppliers. MRP manages the spread of demand across the suppliers.

Managing demand

The MTO sector is characterised by high variety and lower volumes, with limited visibility into future demand.

  • Lack of historical sales data makes it challenging to plan resource allocation, optimise pricing, and manage future demand patterns.
  • Uncertainty means it is difficult to anticipate order volume, type, and timing due to reliance on actual orders, not forecasts.
  • Extended lead times for specific materials make it complicated to adjust production with fluctuating demand.
  • It can be difficult to balance between early deliveries (which may create excess inventory) and just-in-time production (which risks delays).

Communication and collaboration are important to reduce the challenges of demand planning. This requires the sales, production, and purchasing functions to work together to manage demand effectively.

By its very nature, an ERP system integrates the demand side of the business with the operational side of the business, so if there was a change in production capacity, the team can communicate to the customer.

Managing quality – poor quality loses customers

MTO businesses rely on reputation and word of mouth as a major source of repeat or new business. From estimating to design to delivering a quality finish as a result of manufacturing excellence is vital.

No manufacturer these days can skimp on quality control, otherwise they will lose customers. A quality challenge in MTO is that products are often custom-made or have varying specifications based on individual customer requirements. This variability means quality management and measurement needs to be embedded into the manufacturing processes to ensure that quality can be consistently applied across all products.

The solution to manage quality is to integrate quality checks throughout the production process. This can be done with automated inspection systems.

ERP software allows quality information to be captured at critical stages of the production process. Allied with full traceability, the raw material inputs to the MTO product can be tracked and traced back to the original supplier where necessary. This ensures quality, transparency and consistency to be built into the process.

Managing operations

MTO brings unique challenges in optimising the shop floor and managing utilisation in key shop floor resources. An ERP with a Manufacturing Execution System (MES) allows the production required for a custom item to be grouped and scheduled across resources to maximise throughput and minimise delivery time by:

  • Maximising machine utilisation – expensive machines require a return on investment
  • Maximising material usage and minimising waste
  • Managing shopfloor resources
  • Tracking performance to measure Equipment Efficiency and labour efficiency

This visibility into the shop floor allows measurement and management of operations with the ability to track production progress, and efficiency at the machine and/or operator level.

Benefits of ERP in MTO

An ERP system provides an integrated solution to companies that are seeking a way to manage products and associated processes:

  1. In MTO, an ERP system can keep track of delivery dates for new orders to help with timely and consistent delivery and, therefore, helping with managing customer expectations. As it can assess incoming orders and provide the information to schedule production of orders.
  2. An ERP can also coordinate materials, components, and production for each order, and prioritise how jobs are scheduled.
  3. Using the MRP function within an ERP can make it easier to manage the availability of components and complexity of the end products by providing forecasting tools to provide visibility of key materials into the future based upon prior usage.
  4. An ERP system integrates MRP with the Master Production Schedule (MPS), allowing material availability to be included with time and labour requirements to automatically schedule manufacturing jobs.
  5. With an ERP system that connects to external systems, MTO manufacturers can benefit from collaborative forecasting with customers, and communicate quickly with suppliers.
  6. An ERP system enables real-time information sharing about confirmed orders, lead times, and inventory levels between sales, production, and purchasing teams which is essential in an MTO environment.

How MTO manufacturers improve competitiveness

MTO manufacturing involves trade-offs between customisation, resource utilisation, and cost-effectiveness. Companies must compete in an environment where flexibility, affordability, and response time are important in meeting customer demand.

Addressing these challenges requires an holistic approach that considers both production efficiency and customer satisfaction. An ERP system is designed to handle the challenges so that MTO manufacturers can thrive in a dynamic market while delivering customised products efficiently.


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